Thursday, July 28, 2011

My thoughts on the debt limit

At the moment, there is a lot of panic regarding whether or not to raise the statutory $14.2 trillion federal debt limit. This debt limit is a toothless, artificial, self-imposed cap that Congress can (and almost invariably does) increase any time it wants. This limit can be described as “borrowing limit” that Congress imposes on the federal government.

This limit is analogous to a person promising himself that he will never weigh more than 200 pounds, but who nonetheless gains weight after eating too much and exercising too little. When he approaches 200 pounds, rather than changing his bad habits, he simply changes his goal to never weighing more than 210 pounds, then 220, 240, and so on. Unless something changes, he will eventually weigh 500 pounds.

While I’m concerned about the “borrowing limit,” my concern is based on the much more serious threat posed by another debt limit looming over our country. Every credit transaction requires both a creditor and a debtor, and a debtor cannot borrow money without a creditor willing to loan it to him. When creditors become concerned about a party’s ability to repay their debt, creditors demand higher interest rates to compensate for higher degree of risk they assume by lending money. If a party’s financial condition becomes bad enough that they cannot pay off their debts, they have reached the “lending limit” at which creditors will no longer loan them money.

Unlike the $14.2 trillion borrowing limit, America’s “lending limit” will not be self-imposed. Rather, it will be imposed on us by our creditors when they are no longer willing to lend us any more money. At that point, the only way Congress will be able to raise that limit is by restoring confidence that the debt will be paid off. Doing so would require massive reductions in our deficit. Greece, Spain, Ireland, Britain, Italy, etc. are dealing with this to varying degrees right now. Our turn will come.

I support spending cuts to reduce our debt, because I believe higher taxes would make this problem worse, not better. Others disagree, and want higher taxes. Even if people disagree as to the amount, everyone should understand that some amount is too much, whether it is $14.3 trillion, $30 trillion, $100 trillion, or $1.5 (whatever comes after trillion). The national debt has been increasing every single year for decades. Unless something changes, we will hit the second limit.

Cutting back will be hard. I understand that, and don't like it. But the longer we wait to address our debt, the worse it will be when we finally do.